Search This Blog

Monday, October 04, 2010

Maintain this

What's the worst news from the Sixth Report and Order?

“We find that an unbundled warranty is an ineligible BMIC service because it is purchased as a type of retainer and not as an actual maintenance service.” (paragraph 106)

OK, first off, the reasoning is faulty. If an applicant pays every month for a phone line to connect an alarm system to the security company, that line is eligible, even if the alarm is never tripped. Inside wiring maintenance costs are eligible, even though wires don't wear out. To say that a warranty is not an actual service just because you don't use it every year doesn't hold water for me.

I understand where this is coming from. I, too, am appalled at the cost of manufacturers' warranties on phone systems and data network equipment. It definitely feels like they have us over a barrel. But it doesn't rise to the level of abuse of the program. The exorbitant amount that PBX manufacturers charge to schools and libraries is the same amount they charge everyone else. No one is gouging the E-rate.

What effect is this going to have? On the phone side, the answer is Centrex.

I have a meeting this week with a client that is about to sign a new 5-year contract on their phone system, at about a half million per year. Take a look at their options. It would be foolhardy to use a phone system without a service contract, so unless they can come up with a half a million a year out of their own pockets, they'll have to turn off their phone system (and since it was purchased 2 years ago with E-rate funds, let it sit in the corner for 3 more years until they can sell it for scrap). Now normally, they could get a nice deal on some hosted VoIP, and they might be able to cover the district for maybe $1 million per year, doubling their demand for funding. But now their data network won't have a warranty, either, so they can't jeopardize student safety by running their voice over that network. So they'll have to see if they can find a phone company that will give them Centrex service. With Centrex, the wiring will all be installed and maintained by the phone company, and the equipment will be back in the CO, maintained by the phone company. What will that cost? I'm estimating $3.5 million/year.

So the E-rate will pay an extra $3 million per year to move this district backwards to a technology that was cutting-edge in the '60s.

On the data side, applicants will probably just pay out of their own pockets for a spare edge switch, and swap it out when a switch malfunctions. Of course, the district will have to hold on to the malfunctioning switch for 5 years, because they really won't be able to replace malfunctioning hardware, but the switch probably still has some value, so they can't just throw it out, and E-rate rules won't let them sell it to someone who might fix it.

Core switches are more problematic. Applicants will be forced to design networks which can still function in the absence of any single core switch. Those networks will be more expensive, and will likely be limping along if a core switch does fail. More bad engineering made cost-effective by unfortunate E-rate rules.

There is another possible workaround, depending on how this rule is interpreted. It is clear the FCC wants applicants to set up maintenance contracts which set up a pool of hours, where the service provider is paid for hours actually used. If such a contract could also include a pool of money for purchasing replacements for failed components, then maybe we wouldn't see a resurgence of Centrex.

Whether the FCC allows applicants to throw replacement parts into the pool, setting up these pools means:
  1. Applicants will try to set up a pool big enough to cover the worst-case scenario, meaning lots of approved funding will go unused every year (which I don't see as a problem, but which has been called out by the GAO and Commissioner McDowell). And the maintenance cost-effectiveness tug-of-war, which already eats up too much PIA time, will require a whole separate division of Solix to manage.
  2. No matter how big the pool is allowed to get, the applicant runs the risk that there will not be enough funding to replace equipment wiped out by a major catastrophe. Just when the applicant needs help the most, it won't be there.
The pools will increase demand for funding, squeezing the fund in the short term. After a couple of years, the big pile of unused funds from the pools will start flowing back into the fund, and in the end I'd guess that disbursements will actually be lower than with warranties, except in years with large natural disasters.
While I agree that manufacturer warranties seem exorbitant, there is a reason that such warranties are "ordinarily provided in the marketplace to entities receiving such services without e-rate discounts."*
* Third Report & Order, paragraph 23, where the FCC defined Basic Maintenance.


  1. Anonymous10:43 AM

    So, Dan - speaking of maintenance... what are your thoughts on USAC's RFQ for SMARTnet renewals?
    Guess they've concluded that's a "smart" way to maintain their infrastructure ;)

  2. Actually, I was going to blog about that, but didn't for two reasons:
    1) Whether USAC has SmartNET shouldn't really determine whether the E-Rate funds SmartNET. USAC has phone sets, but that doesn't mean E-Rate should pay for phone sets.
    2) If there is an uproar, the end result might be USAC losing SmartNET coverage. The last thing I want is instability in USAC's IT systems.

    But if I were going to blog about it, I would use this URL: